Investing in New Pre-construction Condominiums
In Yorkville & Downtown Toronto.
How to get the maximum Return On Investment (ROI).
Identify your investment objective
What are your plans for the unit once the building is finished and registered? Do you plan to sell the unit or rent it out?
"Rate of Return Investors" buy for rental income while "Wealth Preservation Investors" buy as a safe place to park their money and hold, earning a return on their investment when they sell the unit.
Understanding the realities and underlying economics of Downtown Toronto's New & Pre-Construction Condo Market
Prices for new construction condos are currently about $100/sf higher than resale units in downtown Toronto. With pre-construction units selling at today's prices (average $700-800/sf in the downtown core and $800-1000/sf in Yorkville) carrying costs (mortgage, maintenance fees & taxes) will exceed average rent levels when the units are completed 2015-2016.
So if you are looking to buy a pre-construction unit to rent once the unit is completed and want a return on the rent you most likely will not be able to generate rental income but rather best case scenario break even or you may even have to still kick in a small amount of money each month to cover carrying costs.
If you plan to sell the unit once the building has registered take note that market forecasters are not anticipating the price growth we have seen with pre-construction condos in the past few years to continue to appreciate to the same levels in 2014-2015.
In other words when someone bought off plans in 2008 and now the unit is completed in 2012 there has been a generous price appreciation in the unit. However it is not anticipated that we will continue to see the same price growth for units bought off plans today in 2012 and completed in 2016.
However, having said that there is still opportunity to see a decent return on investment with two bedroom units as there is the possibility of capturing the move up buyer who is finding their one bedroom is now too small which I'll explain further below under What type of unit to buy
Selecting a condo project
Look for high quality finishes and unique features that make the building stand out from other condominium buildings in the area. Unique features could be things like direct access to the subway or green high efficiency mechanics that will keep maintenance fees low. Also consider the building structure. Beware of glass exteriors which could have maintenance issues in the future.
Look at the make-up of the units in the building. Buildings of predominantly one bedroom or one bedroom plus den units tend become rental buildings with few units being owner occupied. These buildings tend to age faster with more wear and tear from moving and not as much care is taken to the general day to day upkeep of the building with owners living offsite.
Balconies and or terraces should be standard. As houses in downtown Toronto become out of reach in terms of affordability for many, the Toronto condo is now the new house and people want units with outdoor space as the balcony or terrace replaces a backyard.
Do your research on the builder. A great resource is Tarion.com where you can check out the builder's track record under the Licensed Builder Directory. Visit other condo developments the builder has built and speak to residents. How has the development stood up to the test of time?
What type of unit to buy
Right now I am advising my clients to buy two bedroom units in new condo developments in Toronto. In the past few years builders in Toronto having been building and selling a lot of one bedrooms and one bedrooms plus dens. There are not a lot of 2 bedroom units being created. If you look at new high rise sales in Greater Toronto Area in January 2012, 55% are one bedroom or one bedroom plus den. 24% are two bedrooms and only 12% are made up of two bedroom plus den.
But in the next few years once people outgrow these one bedrooms there is really no where for them to go as you would need to jump up to luxury buildings if you want anything bigger especially in downtown Toronto.
By the time a pre-construction condo is built in three or four years from now two bedroom units will be much better positioned for resale and return on your investment than one bedrooms. Similarly this will be the case for rental as two bedroom units will be in greater demand to rent simply because there will be less of them available.
If a one bedroom unit or one bedroom plus den is all you can afford then only consider buildings which offer a great variety of suite sizes and price ranges. Again avoid condo projects made up of mainly one bedrooms units as these will likely become rental buildings and units won't hold their value as well when it comes time to sell.
The opposite is true for luxury condo developments. If you are considering purchasing a luxury unit only look at luxury condo projects not regular condo projects that also feature luxury suites. Luxury units in buildings that offer a large choice in unit sizes from bachelors to penthouses and a variety of price ranges don't tend to hold their value as well as luxury suites in buildings that only feature high end units right across the board.
Floor plans - the boxier the better as angled walls prove difficult for furniture placement. Also avoid floor plans that are too narrow which give the effect of living in a bowling alley or a very long hallway.
Finally, always spring for a parking spot as this will be invaluable when it comes time for resale. Same with balcony. Even though you think you may never use it, a unit with a balcony is always more desirable if only as a place to offer to guests to step outside to smoke.
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